FHA condo spot approvals have been one of the best things going in the real estate market over the last few years. Most condos have traditionally been financed with conventional loans, but once the financial markets imploded, conventional mortgage options for condos quickly dried up. Mortgage insurance became harder to get and underwriting guidelines tightened so that many other wise strong borrowers, couldn’t meet the new requirements. Conventional condo loans are still available, but FHA financing means a lower down payment, and for most borrowers, a lower interest rate. The only issue was that condos have to be approved by FHA to show that the condo project is financially viable and doesn’t discriminate. With so much conventional financing available when times were good, few developers applied for FHA approval over the last 10 years, so most buildings in the city, and especially the newer, more desirable buildings, weren’t FHA approved. The FHA spot loan filled this gap. FHA spot loans are a way to finance a single unit in a well run condominium without going through the FHA condo approval process. FHA spot loans have become one of the biggest benefits for condo buyers, but that is about to change.

Starting on October 1^st, the FHA spot loan will go away. This is part of a new FHA condo approval process which in the long run will help a lot of home buyers. The new program will allow Direct Endorsement FHA lenders (like my company) to approve the entire building or project when they approve the individual loan. Once a project is approved by one lender, all other FHA approved lenders will be able to use that approval. This new program will also allow buildings with as few as 2 units to be financed through FHA (the minimum is a five unit building now), and by eliminating the ban against first right of refusal language in the decs and by laws (as long as the projects don’t actively discriminate) if will mean a lot more condos will now be eligible for financing. This new process will be a big improvement in the long run, but in the short run, it is going to make it harder to buy and close on a condo, especially for those first time home buyers who want to use the $8,000 tax credit and must close by the end of November.

With the new change, any building that hasn’t been approved by FHA in the last 12 months (from October 2008) will have to be submitted to FHA for a new project approval. So even buildings currently on the approved list will be affected. As part of the new program, in order for an FHA Direct Endorsement Lender to approve the project, they will have to gather more information than what is now required on the spot loans, and it is unclear how to collect some of the required information. The lender is taking on more responsibility and the paperwork and documentation is more extensive. This will put a bigger burden on the lenders to make sure they get everything right, because they will be held responsible by HUD (Department of Housing and Urban Development, the agency behind FHA) for making sure the project fits all the guidelines. HUD will insure that everyone is following the same rules by requiring that each lender submit their first 5 project approvals as test cases to HUD, before they are allowed to approve projects on their own. What does this mean to any buyer looking to buy a condo in a building not approved in the last twelve months? Expect gridlock.

HUD isn’t staffed up to underwrite and approve the volume of loans that are about to come their way. Every FHA Direct lender in the country will be sending out their 5 test cases in early October (those who can will try and have all the test cases on HUD’s desk October 1^st). HUD will go through these files as quickly as they can, and as a project is approved it will be placed in a data base showing that that project is now on the FHA approved list. Once a company has passed all their test cases, they will be able to handle the flow by itself. But no one knows how long it will take to get through the back log, and it could take months to work through all this. HUD won’t be looking at commitment or closing dates on the contract, they will just be trying to get through the flood of applications as fast as their system will allow. So, if you are looking to buy a condo, and time is an issue, be prepared. If you are looking at an FHA spot loan or an FHA approved condo, get your offer in now. Everything changes on October 1^st.

Call me if you want to check on whether a condo is on the approved list now. Here is what is needed to approve a spot loan in the Chicago area:

• The condominium project must be complete, including all common areas and facilities.
• Control of the common areas must have been turned over to the homeowners
• association for at least one year.
• The owners association must provide evidence that the project has the appropriate
• hazard, liability and flood insurance.
• Individual units in the project must be owned fee simple. The project’s legal documents must provide for undivided ownership of common areas by unit owners.
• The project’s documents should not place any legal restrictions on conveyance. Any provisions that seek to limit the free transferability of title is unacceptable. Such restrictions include rights of first refusal and restrictive covenants.
• At least 90% of the units in the project must have been sold.
• At least 51% of the units in the project must be owner occupied.
• No single entity may own more than 10% of the units in a project. The 10% restriction does not apply when the ownership of less than three units would disqualify an otherwise eligible project. The Department recognized that the 10% cap on the number of units that may secure FHA insured mortgages in a given project can place a small regime at a disadvantage, since only a few units will invoke the limit. Accordingly, a two tiered system was established. For condominium projects having more than 30 units, no more than 10% of the units may have FHA insured loans at any given time.
• Condominium projects consisting of 30 units or less, can have up to 20% of the units encumbered by FHA insured mortgages under the spot loan rule.

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